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Why Not Believe What The Market Says?

The ability of big-picture analysis to ignore what is actually happening in markets, while focusing on what theory says markets should be doing, never ceases to amaze.

I am reminded of it almost every weekend with the comments that readers typically upload to the ‘Comment' sections on websites that publish my weekend newspaper columns. By far the majority of comments are based on ‘big-picture' analysis and its theories, with total disregard of what the particular market is actually doing.

For instance, comments are only now dying out in response to bullish columns on the economic recovery or stock market over recent years, (whether on its seasonal patterns or technical buy signals). For four years it's been that "No way the market can rally, no way we can have a bull market with all the mistakes the stupid government is making", or with the growing debt load, or whatever.

That was even though in fact a bull market has been underway for almost four years. Of course it won't last forever. Over the last 110 years a bear market has come along on average of every 4.4 years. But, a bull market it is and has been, regardless of whether big-picture theory says money should not have been flowing in.

A recent column on the dangers in the gold market A Warning About Gold From Inflation, The Dollar, And Mining Stocks! included data showing that although easy money polices began in 2001 and have become ever more aggressive, and were widely expected to create an inflationary spiral, an expectation that (among other things) helped support the big bull market for gold, after 12 years inflation has still not shown up to any degree.

The majority of those posting comments on the websites that published the column, ignored the charts in the column, ignored the facts, and since the inflation data did not jibe with the big-picture theory of what should have been happening, were along the lines of:

"Mr. Harding doesn't seem to realize that the government has been faking the data since 2001 to hide the rising inflation, so they can continue with the easy money stupidity. Gold is the only safe investment and will reach $5,000 an ounce in two years."

Well. perhaps so. And when its correction ends, whether its next week or a year from now, hopefully we will be back on a buy signal for it in a timely manner. But the facts right now are that gold is down $250 an ounce from its peak of $1,900, and as my column pointed out, perhaps there are reasons for that profit-taking to be taking place.

This weekend's internet comment sections have been regarding my column on Treasury bonds, and that we have been on a sell signal for them.

My column showed a chart of what bonds have actually been doing for the last five years (which was certainly not always what common sense would say they should have been doing), and shows their current overbought condition, the sell signals on the technical indicators, how bonds have declined 11% since July, and the appearance that they have further to go on the downside.

The only guesswork is the latter, that they appear in the charts to have further to go down.

The rest was simply the facts in the charts of what bonds have been doing over the past five years or so, and whether indicators were more helpful than theory at various times in determining what was most likely to happen going forward.

Once again, the comments seem to indicate the chart was not even glanced at. Dozens of them along the lines of:

"Uncle Ben isn't going to stand for bond rates rising."

"No way bonds can decline, which would mean interest rates would rise, which would hurt the housing recovery. The Fed will not allow it. They will just increase their bond-buying to keep bond prices rising."

Well excuse me. But bonds are declining and have been since July. Not theory. Fact.

When the large domestic and global bond-holders decide they want to lighten up on their loans to the U.S., the Fed doesn't have the degree of control some seem to think. As the chart shows, after QE1 and 2008 fears pumped bonds to an overbought condition, they plunged 21% (past the 20% threshold of a bear market), back down to normal, and rattled along that base for a year and half before buying came back in.

And when they moved to an overbought condition in 2010, profit-taking drove them back down 14% to normal, even while the Fed was launching QE2.

Yes, the Fed subsequently launched ‘operation twist', and with the help of fearful investors still pulling money out of the stock market with the worst of timing, and pouring it into bonds, bond prices have been pushed into an overbought condition again.

But even with last month's announcement of QE3, bond-holders are obviously impressed more by the overbought condition, the risk it has created, and the temptation to take profits again than they are by the Fed's action.

Are we guessing about that, or theorizing? No, it's simple fact shown in the chart. Bonds have lost 11% of their value since July. That can only happen if selling is overwhelming buying, no matter if it's the Fed that's doing the buying or not. Markets don't often lie.

Could we be wrong with the sell signal, by not getting back in in time? Of course. But in concluding we are wrong, investors really should deal with reality not theory, observing and paying attention to what a market is actually doing, not what a particular theory or big-picture condition says it should be doing.

Stock market is short-term overbought.

As I noted on Thursday morning's blog, the biggest weekly rally since December 2007 has the major indexes short-term overbought above short-term 50-day moving averages.

Yesterday's further positive activity going into the weekend did not change that condition.

That may not mean anything. As a glance at the rally last winter to the April top shows, the market can just keep climbing higher while remaining in a short-term overbought condition above the 50-day m.a., especially in its favorable season rallies.

But next week is the week before the month's options expiration week, and they tend to be negative. And that pattern may be influenced at this point by the overbought condition that tempts some profit-taking.

(The last short-term market pattern was the ‘monthly strength period'. If you have read my books, you may recall the market has a strong history of being positive from the last one or two trading days each month through the first 3 or 4 trading days of the following month. And it certainly was this time).

Global markets for the week.

A great week virtually around the globe. In the U.S. it was the biggest weekly gain since December, 2007, a statistic I could do without, since that week's big spike-up was followed by the first serious plunge in the 2007-2009 bear market.

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